Happy Sunday!

This is week two of our ILIT (irrevocable life insurance trust) deep dive.

As I’m sure you remember, an ILIT basically works like this:

1. The grantor creates an ILIT (they cannot be the trustee (manager) or beneficiary of the trust);
2. If a life insurance policy exists it is moved into the trust; if one does not exist, the Trustee applies for a policy on the grantor – the ILIT is the beneficiary;
3. The Trustee opens a checking account in the name of the ILIT;
4. The grantor gifts money into the trust checking account;
5. The grantor gives trust beneficiaries a chance to withdraw that money for 30 days (called “Crummey Letters” and a tax requirement);
6. When money not withdrawn after 30 days, The Trustee pays for life insurance premiums out of the trust account;
7. When the grantor dies, the policy pays into the ILIT and can be used for estate taxes (but not how you think).

Make sense? Good.

Now, here are three things you should know about ILITs before creating one.

1. If you transfer an existing policy into an ILIT you can’t die for three years.

The government has basically created a three year look back period on existing life insurance policies to prevent you from creating an ILIT and moving assets out on your death bed.

Translation = if you have existing policy you want to move out, get started earlier rather than later.

2. The best Trustee is usually an independent Trustee.

If you name your spouse as the Trustee there is a chance the government could deem them a continuation of you and include the trust assets in your estate (this is bad).

Also, it’s helpful to have someone who knows what they are doing so they can follow the rules with the Crummey letters (see above). Pros are good at this.

3. The ILIT does NOT pay your estate taxes directly.

What the ILIT does is provide liquidity to purchase assets from your estate and inject cash your estate can use to pay off any estate tax obligations you may have.

For example, let’s say you have a healthy real estate portfolio – let’s call it $8m.

You know you have some estate tax liability (about $900k) and don’t want to have to liquidate your real estate to pay the estate tax.

So you create an ILIT and drop a $1m life insurance policy in there.

When you die the policy pays out and the Trustee can then take that money and purchase real estate from your estate, keeping the real estate in the family and paying your estate taxes a significant discount (the price is still the same but the amount you paid for the liquidity is much lower – just your insurance premiums).

Hopefully this makes sense!

If you have any questions, please let me know.

Otherwise, next week we’ll go through an example and show you some of the fun ways to use these for your benefit.

Have a great week!

Cheers,

Christopher Small
CMS Law Firm LLC

PS – don’t keep this estate planning stuff to yourself – you know it’s important and we LOVE referrals!

PPS – note for CLIENTS – our office will be CLOSED December 25-January 1. If you are planning on waiting until the end of the year to get started or get done, don’t wait too much longer!